What is a Debt Consolidation Program?

Do you have debt from credit cards, medical bills, personal loans, or other sources? If so, you may be overwhelmed and looking for a way to take control of your finances. After all, it can be very difficult to juggle multiple debts and due dates. A debt consolidation program, of which there are several options, may be just what you need to get rid of your debt and build a secure financial future.

A debt consolidation program is any service that helps you combine multiple debts into a single payment. These programs can take many different forms, including debt consolidation loans, debt management plans, and debt settlement programs. This article covers four different debt consolidation program options, including the pros and cons of each, to help you figure out which one is best for you.

Debt consolidation loans

A debt consolidation loan enables you to combine several debts into one, often at a lower interest rate than the rates you’re paying on all your debts, which means you could save a lot of money over time. This type of loan could make it easier for you to pay off your debts in about two to five years and eliminate the stress that often comes with juggling multiple payments each month.

But while it could help you get out of debt, a debt consolidation loan won’t necessarily help you learn smarter money habits that will prevent you from getting right back into debt again. Think of it as a tool that gives you some breathing room so you can get back on your feet and design a long-term plan for a financially secure future, not a magic solution that can fix all of your debt problems. Also, you’ll likely need excellent or good credit in order to take out a debt consolidation loan.

Pros

You may pay off your debt quicker

You have a fixed payment schedule

You can simplify the debt payoff process

Cons

There may be upfront costs involved

If you have a spending problem, this may not be a long-term solution

You need good credit to qualify

Balance transfer cards

A balance transfer card gives you the opportunity to consolidate your credit card debt into a single credit card with a promotional rate that may be as low as 0 percent. While this may sound like the ultimate solution, you almost always need to pay a balance transfer fee. This varies from card to card, but most charge between 2 and 5 percent of the balance you’re transferring, with a minimum fee of about $5. Fortunately, some balance transfer cards will waive the fee if you make the transfer within a certain number of days of opening the card.

Also, the promotional rate on balance transfer cards doesn’t last forever, usually between 12 and 18 months. After the promotional period ends, the card will function like a typical credit card. Your rate will go back up and you’ll still be required to pay off all of your remaining debt. Keep in mind that you’ll likely need excellent or good credit to qualify. Before deciding on a balance transfer card, it’s important to consider how much you are planning to transfer to the card and what you can put toward paying it off each month.

If you choose the right balance transfer card for your needs, pay down a large balance, and land a 0 percent promotional rate, it could save you hundreds or even thousands of dollars. Keep in mind that the actual balance transfer itself has no effect on your credit scores. What happens before and after the transfer is what usually impacts your credit.

Pros

You can consolidate your payments

You can save money on interest

You can move your debt to a credit card that has a lower interest rate and more favorable terms

Cons

There may be a balance transfer fee involved

The low promotion interest rate doesn’t last forever

You could add to your debt if you have a spending problem

Credit counseling

Debt consolidation programs offered by credit counseling agencies involve affordable monthly payment plans that fit your budget and lifestyle needs. They also offer debt management plans (DMPs) for consumers with a significant amount of credit card debt. These plans could help you secure lower interest rates with your creditors and get out of debt faster than you would with minimum payments, but you may have to pay an enrollment fee.

Here’s how a DMP works:

  • Your credit counselor negotiates a lower interest rate on your credit cards and sets you up with a payment plan that gets you out of debt in 3-6 years
  • Then, you send monthly payments to your credit counseling agency and they distribute your funds to your creditors until all your debt is paid off

If you’re interested in pursuing credit counseling, don’t just choose the first credit counseling agency you find. Make sure they are accredited, certified, and have positive reviews on the Better Business Bureau (BBB) website. Be cautious of any for-profit company that positions themselves as a credit counseling agency, as most reputable agencies are non-profits and members of the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Once you decide on an agency, you’ll likely receive:

  • Assistance with designing a budget
  • Free review of your credit reports
  • Discussion on next steps on how to improve your finances
  • Referrals to other tools and resources that you may benefit from

You may be eligible for credit counseling if you owe at least $5,000 worth of credit card or personal loan debt. It may be a great way to take control of your debt if you can find a reputable agency and a credit counselor you feel comfortable with that has your best interests in mind.

Pros

You can repay your debt in one, manageable monthly payment

There will be minimal impact on your credit score

You’ll enjoy relief from debt collectors

Cons

A long-term commitment is required

You will need to close your credit card accounts

There won’t be a reduction in principal debt

Debt settlement

Debt settlement isn’t exactly a debt consolidation program, but involves negotiating with your creditors to settle for less than what you owe. You can do this on your own, but working with a professional has its advantages. Since a professional debt negotiator at a debt settlement company has more experience negotiating with creditors, they’re likely able to get larger debt reductions than you could on your own.

If you enroll in a debt settlement program, you will:

  • Deposit money into a special account that you own and control every month
  • As your balance goes up, the company you hired will contact your creditors to negotiate lower settlement amounts
  • Once your debt settles, you’ll need to pay a fee that’s 15% to 25% of your total enrolled debt

You may be able to settle your debt in 24 to 48 months. However, this method may come with some drawbacks such as a drop in credit score and phone calls from your creditors. In addition, there are no guarantees that you will get reductions on every debt. Results will vary depending on who you owe, how much you owe them, and other factors.

To qualify for debt settlement, you must usually owe more than $7,500 in debt and be going through a hardship that is preventing you from being able to stay current on your bills. Examples include job loss, divorce, medical problems, or death of a spouse, etc.

Pros

You can significantly reduce your total debt.

You’ll pay one small deposit every month.

You can pay off debt faster than you’d be able to if you just made minimum payments.

Cons

Debt collectors may call you or send you letters more frequently.

You may negatively impact your credit score.

There may be fees involved.

How to choose the right option for you

While one debt consolidation program may be right for a friend, another one may make more sense for you. Before committing to any of these options, consider the following:

  • How much you owe
  • What type of debt you have
  • How much you can afford to pay each month
  • The advantages and drawbacks of each solution as well as your long-term financial goals

Here’s a comparison chart that can help make your decision a bit easier:

 

Amount of debt required

Type of debt

Monthly cost

How long it takes

Debt consolidation loan

$1000+

Credit card, personal loan, medical, department store card, private student loan

More than current minimum payments

24-60 months

Balance transfer

$1000+

Credit card

More than current minimum payments

N/A

Credit counseling

$5000+

Credit card, personal loan

Less than or equal to current minimum payments

36-60 months

Debt settlement

$7,500+

Credit card, personal loan, medical, department store card, private student loan

Less than current minimum payments

24-48 months

Once you pay off your debt via one of these solutions, your goal should be to stay out of debt. You can do so by paying yourself first, creating a budget and sticking to it, eliminating unnecessary expenses such as cable or eating out, and living below your means.

Explore your options for getting out of debt

The reality is that paying off debt can be very challenging, especially when you have to divide your money among several different credit cards, loans, and other debts. Freedom Debt Relief is here to help you make the right choice. Our Certified Debt Consultants can help you choose the ideal solution for your particular situation and achieve your goal of leading a debt-free life. Find out if you qualify now.